A Populist Approach to Pension Funds

  • The Boston Globe
  • By Joseph P. Kennedy II

While President Bush pursues setting up private retirement accounts within Social Security, there is another way to allow Americans to build up significant savings without costing taxpayers a dime: Give average working people access to the investment expertise of public pension funds.

Last year the Massachusetts state pension fund, run by state Treasurer Tim Cahill, earned 14 percent — over 1,000 percent better than most savings accounts.

If you have a little money to invest, wouldn’t you like to reap that return without having to sort through a dizzying array of stocks, bonds, mutual funds, CD’s and other investment options?

The pension fund, formally known as the Massachusetts Pension Reserves Investment Trust, has $36 billion in a broad array of investments, including some that are off-limits to all by the wealthiest investors.

In the jargon of money managers, investment categories are known as “asset classes.” They include public equities — stocks and corporate bonds, which provide steady rates of return no matter how the corporate performs.

Certain asset classes that provide the greatest returns are also the most risky. The government, in an effort to limit the losses to people who don’t have huge amounts of money, prohibits them from investing in asset classes like hedge funds and private equity.

This blunt instrument means that only the rich can legally participate in many of the best-performing funds. But when these alternative investments are part of a diversified portfolio, they can significantly boost performance and actually protect investors from downswings in more traditional asset classes.

To how does this work here in Massachusetts? The Pension Reserves Investment Management board hires the industry’s best financial advisors who in turn recommend the best money managers and funds to invest in. The results is that the state pension fund returned 14.41 percent in 2004 and has averaged close to 11 percent over the last ten years, outstripping the markets not only in terms of overall performance but also in steadier growth.

Up until now, the fund has worked solely on behalf of public employees vested in retirement systems, including teachers, state workers, and many city and town employees. Opening the fund up to investment by ordinary citizens would shift it into management and oversight responsibilities it does not currently face.

In Massachusetts, state legislation would be needed to offer this opportunity. At the federal level, exemptions or registration under the Securities Act of 1933 and the Investment Company Act of 1940 would be required.

Banks and mutual fund companies, the only investment choices available to most consumers, won’t like the competition opened up by these changes. New accounting and oversight duties may provoke resistance from the fund itself. But the lesson from the fund’s success is simple: Diversification across all asset classes provides superior and stable long-term results.

We ought to make the same model work for everyone who has money to invest but no access to the investment savvy available to the Rockefellers, the Kennedys, and the Romneys.

Throwing open the fund’s doors would bring tremendous benefits to the state and its citizens. Average working people could see much greater returns on their money whether they invest $100 or $1 million.

Many mutual funds have excellent track records. But for the average investors, choosing from the endless menu of mutual funds is mind-boggling.

The fund also offers investors a much smoother ride than mutual funds – critically important for the average investor who simply can’t stomach a huge drop.

Diversification in everything from domestic and international equities, emerging market funds, fixed-income treasury bills, high-yield corporate debt, and hedge funds, real estate, timber and private equity enables the fund to produce steady returns.

Wealthy Americans who possess a similar range of investment opportunities reap healthy returns on their money. But as the rich get richer, the poor get poorer, watching inflation outstrip the meager returns on their bank accounts.

Opening up the fund is not just smart, it’s the fair thing to do. Taxpayer money goes toward creating the best-in-class investment models and hiring the best investment advice. We have an obligation to make that expertise work not just for a limited pool of pensioners but also for every taxpayer in the Commonwealth.